GLOBALIZATION

INTERNATIONAL BUSINESS
OBJECTIVES

I.

To define globalization and international business and how they affect each other
To understand why companies engage in international business and why
international business growth has accelerated
To comprehend criticisms of globalization
To become familiar with different modes a company can use to accomplish its global
objectives
To grasp the role social science disciplines play in understanding why international
business is different from domestic business

WHY ARE GLOBALIZATION AND INTERNATIONAL BUSINESS

IMPORTANT?
As people, firms, and other organizations have expanded their access to resources,
goods, services, and markets across wider geographical areas, they have also become
more deeply affected (positively and negatively) by conditions outside their home
countries. Globalization refers to the ongoing social, economic, and political
process that deepens the relationships and broadens the interdependencies amongst
nationstheir people, their firms, their organizations, and their governments.
International business involves all commercial transactionsprivate and
governmentalbetween parties of two or more countries. Global events and
competition affect almost all firmslarge or small. However, the international
environment is more complex and diverse than a firms domestic environment. [See
Fig. 1.1.]

II. THE FORCES BEHIND GLOBALIZATION

Globalization is a difficult concept to measure. Currently, about 25 percent of world
production is sold outside of its country of origin, restrictions on imports continue to
decline, the foreign ownership of assets as a percent of world production continues
to increase, and world trade continues to grow more rapidly than world production.
That said, on a value basis, only a few countries (mainly very small nations) either
sell more than half of their production abroad or source more than half of their
consumption from foreign countries. Further, the principal source of capital in
almost all nations is still domestic. Following are seven interrelated factors that have
contributed to the spiraling growth in globalization.
A. Increase in and Expansion of Technology

B.

C.

D.

E.

F.

G.

Vast improvements in transportation and communications technology

including the development of the Internethave significantly increased the
effectiveness and efficiency of international business operations.
Liberalization of Cross-Border Trade and Resource Movements
Over time most governments have lowered restrictions on trade and foreign
investment in response to the expressed desires of their citizens and producers.
In addition, the General Agreement on Tariffs and Trade, the development of
economic blocs such as the European Union, and other such facilitating
mechanisms have provided increased access to many foreign markets.
Development of Services That Support International Business
Services provided by government, banks, transportation companies, and other
businesses greatly facilitate the conduct and reduce the risks of doing business
internationally.
Growing Consumer Pressures
Because of innovations in transportation and communications technology,
consumers are well-informed about and often able to access foreign products.
Thus competitors the world over have been forced to respond to consumers
demand for increasingly higher quality, more cost-competitive offerings.
Increased Global Competition
The pressures of increased foreign competition often persuade firms to expand
internationally in order to gain access to foreign opportunities and to improve
their overall operational flexibility and competitiveness.
Changing Political Situations
The transformation of the political and economic policies of the former Soviet
Union and the Peoples Republic of China has led to vast increases in trade
between those countries and the rest of the world. In addition, the
improvements in national infrastructure and the provision of trade-related
services by governments the world over have further led to substantial increases
in foreign trade and investment levels.
Expanded Cross-National Cooperation
Governments have increasingly entered into cross-national treaties and
agreements in order to gain reciprocal advantages for their own firms, to attack
problems jointly that one country cannot solve alone, and to deal with areas of
concern that lie outside the territory of all countries. Often, such cooperation
occurs within the framework of international organizations such as the United
Nations, the International Monetary Fund, the World Trade Organization, and
the International Bank for Reconstruction and Development (World Bank).

III. CRITICISMS OF GLOBALIZATION

Antiglobalization forces have protested both peacefully and violently as they press
for legislation and other means to stop or slow the globalization process. Issues of
threats to national sovereignty, increasing income inequality, and environmental
harm are addressed in the PointCounterpoint sections found throughout the text.
A. Threats to National Sovereignty
Many citizens fear that a countrys participation in multilateral agreements will
diminish its sovereignty and freedom from external control and curtail its ability
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to act in its own best interests. In particular, people in small countries worry
that dependence on larger countries for sales and/or supplies, as well as the
presence of large international firms, will make them vulnerable to the demands
of parties against which they are essentially powerless. In addition, people the
world over are concerned that globalization will bring the homogenization of
products and traditional ways of lifeincluding language and social structure.
B. Economic Growth
Clearly, economic growth can result in both positive and negative consequences,
including damage to society and the environment. While globalization can, in
fact, support the sustenance of natural resources and the maintenance of an
environmentally sound planet, unless the positive consequences of globalization
keep pace with the negative costs of economic growth, the sustainability of
economic improvement on a worldwide basis will, at best, be problematic.
C. Growing Income Inequality
Offshoring, the process of shifting domestic production to a foreign country for
the purpose of serving the home market at a reduced cost, speeds up the process
of altering the relative economic discrepancies between the two countries
involved. Thus, even if the overall global gains from globalization are positive,
there remains a continuing challenge to bring about the positive gains in ways
that minimize costs to the losers.
IV. WHY COMPANIES ENGAGE IN INTERNATIONAL BUSINESS
When engaging in international business, a firm should consider its mission, its
objectives, and its possible strategies. Primary objectives would include the
following:
A. To Expand Sales
Companies may increase the potential market for their sales by pursuing
international consumer and industrial markets.
B. Acquire Resources
Foreign-sourced goods, services, components, capital, technology, and
information can make a firm more competitive both at home and abroad.
C. Minimize Risk
Firms seek foreign markets in order to minimize cyclical effects on sales and profits.
Defensively, they may also wish to counter the potential advantages that competitors
might gain from participating in foreign market opportunities.
IV. MODES OF INTERNATIONAL BUSINESS
A firm can engage in international business through various operating modes,
including exporting and importing merchandise and services (see Chapters 6 and 7
regarding international trade) and licensing and foreign direct investment (see
Chapter 14 regarding direct investment and collaborative strategies). The firm or
individual exporting merchandise or a service will receive international earnings
while the firm or individual importing merchandise or a service will make an
international payment. [See Fig. 1.3.]

A. Merchandise Exports and Imports

Merchandise exports consist of tangible (visible) products, i.e., goods that are
sent to a foreign country for use or resale. Merchandise imports consist of
tangible products, i.e., goods, brought into a country for use or resale.
B. Service Exports and Imports
Service exports and imports represent intangible (invisible), i.e., nonmerchandise, products.
1. Tourism and Transportation. When an American flies to Paris on Air
France and stays in a French-owned hotel, payments made to the airline
and the hotel represent service export earnings (income) for France and
service import payments (expenses) for the United States.
2. Performance of Services. Some services, such as banking, insurance,
rentals, engineering, turnkey operations (construction, performed under
contract, of facilities that are transferred to the owner when they are ready
for operation), and management contracts (arrangements in which one
firm provides personnel to perform management functions for another), net
companies export earnings in the form of fees paid by a foreign client.
3. Use of Assets. Firms may receive export earnings, i.e., royalties, by
allowing foreign clients to use their assets (trademarks, patents, copyrights,
and other expertise). Licensing agreements are contracts that represent a
transaction in which a licensor sells the rights to the use of its intellectual
property to a licensee in exchange for a fee or royalty. Franchising is a
special form of licensing in which the franchisee is granted additional
control over the operation in exchange for the provision of additional
support and services by the franchisor.
C. Investments
Foreign investment consists of the ownership of foreign property for the
purpose of realizing a financial gain via profits, growth, dividends, and/or
interest.
1. Direct Investment. Foreign direct investment (FDI) occurs when an
investor gains a controlling interest in a foreign operation. Sole ownership
represents 100% ownership of an operation; however, effective control can
be realized with just a minority stake if the remaining ownership is widely
dispersed. A joint venture represents a direct investment in which two or
more parties share ownership.
2. Portfolio Investment. Portfolio investment is a noncontrolling interest
in a venture made in the form of either debt or equity. Often, firms use
portfolio investment as part of their short-term financial strategy.
D. International Companies and Terms to Describe Them
There are numerous forms of collaborative arrangements through which
companies work together internationally, such as joint minority ownership,
licensing, management contracts, or other long-term contractual arrangements.
A strategic alliance is more narrowly defined to indicate that the agreement is
of critical importance to the competitive viability of one or more of the partners.
The multinational enterprise (MNE) is a firm that takes a global approach to
foreign markets and production, i.e., it is willing to consider markets and
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production sites anywhere in the world. The terms multinational corporation

(MNC) and transnational company (TNC) may also be used in this context.
V. WHY INTERNATIONAL BUSINESS DIFFERS FROM DOMESTIC
BUSINESS
External environments that affect the ways in which firms operate internationally
include physical, societal, and competitive factors. In fact, the amount of adjustment
required in foreign operations is largely influenced by the extent to which the home
and host country environments resemble one another. [See Fig. 1.4.]
A. Physical and Societal Factors
1. Political Policies. Politics often determine where and how international
business takes place because of the influence of government leaders over
the process.
2. Legal Policies. While every nation has its own body of business law,
agreements between/amongst nations determine international law.
Domestic business law may include regulations on home-country firms in
both home and host countries regarding such matters as taxation,
employment, and foreign-exchange transactions. International law may
also determine how and whether firms can operate in certain locales. [Note:
while most countries have laws that recognize and protect intellectual
property rights, many do little to enforce them.]
3. Behavioral Factors. By studying the disciplines of anthropology,
psychology, and sociology, managers can better understand the
interpersonal norms of people in foreign countries and the reasons why
operating procedures may need to be adjusted in foreign locales.
4. Economic Forces. Economics explains country differences in costs,
currency values, and market size. It also provides the analytical tools to
determine the impact of foreign operations on home and host countries, as
well as the effect of a countrys economic policies and conditions upon
domestic and foreign firms.
5. Geographical Influences. The uneven distribution of resources results
in different opportunities being located in different parts of the world. In
addition, geographical barriers affect transportation, communications, and
distribution channels within a country. Finally, the probability of natural
disasters and adverse climatic conditions make it riskier to invest and
operate in some countries than others.
B. The Competitive Environment
The global competitive environment varies both by industry and by country.
Likewise, a companys competitive situation may differ in terms of its relative
strength and in terms of which competitors it faces from one country to another.
Thus, a firms competitive strategy directly influences how and where it can
operate most effectively. [See Fig. 1.5.]